New Maryland Law Requires Withholding From Non-Resident Contractors
If you employ non-resident contractors for improvement of real property, you may be required to withhold payment to that contractor in an amount equal to three percent (3%) of the contract price as the contract price is earned through performance. By law effective July 1, 2003, Maryland imposed this withholding duty on any person doing business with a non-resident contractor under a contract that equals or exceeds $50,000 in value. The retained payment must be withheld for thirty (30) days after the non-resident contractor has requested a Tax Clearance Certificate from the Comptroller of the State. The burden imposed upon those contracting with non- resident contractors is broad and not yet defined by permanent regulations. The interim emergency (expiring 12/31/03) regulations provide the following further information:
"Contractor" means building electrical plumbing, heating, painting, decorating, paper hanging, air conditioning, ventilating, installation, sheet metal, steel, masonry, carpentry, plastering, concrete, road, bridge, landscaping, roofing, demolition and dismantling general contractors and sub-contractors. The Comptroller's Office indicates that they do NOT interpret this definition to include a supplier of materials or equipment only.
"Non-resident Contractor" means a contractor who does not maintain a regular place of business in Maryland.
"Regular Place of Business" means a bona fide office (not just statutory) a factory, a warehouse or other space which is not simply a temporary office at the site of construction.
The tax clearance certificate process with the State Comptroller's office is very detailed and must be submitted thirty days before the final 3% payment can be released to the non-resident contractor. If the Comptroller issues a certificate that no tax is due prior to expiration of the thirty days, the funds can be released.
We recommend that our clients consider adding standard language to all contracts and sub-contracts expressly authorizing the withholding. We also recommend inclusion of a clause barring any non-resident contractor or sub-contractor from withholding earned amounts from its resident sub-contractors.
This article is published for the clients and other friends of Whiteford, Taylor & Preston L.L.P. This article has been prepared for general informational purposes only and are not intended as legal advice.